Iron Mountain Incorporated (NYSE:IRM) Citi Virtual Global Property CEO Conference March 8, 2021 9:45 AM ET
William Meaney - President & CEO
Barry Hytinen - EVP and CFO
Conference Call Participants
Michael Rollins - Citigroup
Good morning and welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Mike Rollins with Citi Research. And we're pleased to have with us Iron Mountain and CEO, Bill Meaney.
This session is for Citi clients only, If media or other individuals are on the line, please disconnect now. Disclosures are available on webcast. And for those joining us here today to ask management any questions, simply type them into the question box on your screen, they'll come directly to us and we'll do our best to include and ask those questions during the session.
So Bill, we will turn it over to you to introduce your company and any members of your management team that are with you today. And answer -- really the following question coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are three reasons why they should invest in Iron Mountain?
Okay. Well, first -- so with me in the room, I have Barry Hytinen, who is our CFO; Greer Aviv, who is the Head of Investor Relations; and Tony Zaki, who is my Chief of Staffing is [indiscernible] to me right now from our technology group. And that kind of is a good segue. People will say, why technology and to kind of to answer your question, Mike, if you think about it, we're one of the better performing REIT stocks recently. And I think people really, first of all, understanding that the durability of Iron Mountain.
If you think about going through '20 -- the 2020 crisis is our storage revenue, which is 80% of our profits grew organically in the records management business, which is the traditional side of the business grew at 2% organically, slightly -- flat to slightly down in terms of volume. But with on average 3% price increases that we were actually increased the organic revenue of our storage business right during the crisis.
So I think the durability of the story, and the business is really through. I think, though, if you kind of think about going forward is really the transformative growth side. And the transformative growth is we kicked off Project Summit, which is a major in fundamental restructuring of the business at the end of 2019. And there are really two pieces of that. One is the cultural piece, and the cultural piece is really saying and we said internally, the company feels the same a year from now we will have failed that was at the start of 2008. And that's really a maniacal focus on the customer being the center of our focus, right -- our focal point.
And we did a number of things to help assist that. First part of Summit as we took out 45% of our Vice Presidents and above in the business, and people at first saying how can you operate the business? We knew it was important to remove a lot of layers of bureaucracy, if we were going to really be nimble and agile and listening and serving our customers. So that was kind of the first aspect.
The second part though, it wasn't just taking people out. We actually redeployed people or redeploy resources and built up a strategic accounts business. So at the beginning of 2020, we set up a global strategic accounts business in both from internal hires, but also bringing people in from Accenture, IBM, SAP, HP, companies that were used to selling solutions and systems to actually solve the problem that the customer was wanting, rather than kind of a transaction selling.
So as we went into 2020, we started building that. And it's also the other reason why during 2020 is that WellStar traditional side of our service business in terms of retrieving boxes, was negatively impacted at one point by 40% down overall, but we ended the year about 20% down on that business. But at the same time, our digital services, the new services that our global strategic accounts and other sales leaders were talking and delivering to our customers grew at 8% year-on-year. And we exited the year with about $270 million worth of revenue associated with digital services and expect that to grow by another $50 million as we go into 2021.
So the -- if you put that together along with the R&D that we've been doing historically, is if you think about 5 years ago, our total addressable market as a company in terms of the products and services that we had, what they were aimed at was about $10 billion. And we were at the time a little over a $3 billion business. We sit here today being over $4 billion business, the products that we developed and now with the sales teams that are actually having what are called Solution Discussions with our largest most complex and closest customers, is the total addressable market for the company is now at $80 billion a year, growing at over 10% organic growth in those markets.
So if you -- as we sit here going into 2021 is that we actually set guidance that we -- for revenue to be between 4% and 8%. So as a midpoint 6% organic revenue growth going into 2021, and that's the highest that we've ever guided to as a company. And really it's a combination of culture, having the customers, our North Star, taking out some of the layers of bureaucracy so that we can be much more agile as a company, as well as this is the R&D that we've been doing since 2015 to really develop products and services on where our customers are going or where their biggest needs are.
So, as we sit here today, we feel pretty blessed that we had such a strong business that could guide us or carry us through 2020. But going into 2021, we're really excited about the hard work and development in R&D that we've done over the past years to set us up. And, I mean, wrapping all around this is a strong sustainable focus. So I think people have known for a very long time, we've been very focused on ESG.
So we are the only data center company that can actually give green credits for 100% of our deployments on data center, right? So we can actually pass that through to our customers, because we've bought 15 to 16 years forward from renewable sources, all the energy that we need for our data centers. And that's even, in fact, in spite of the fact that how fast that businesses is growing for us.
And around the social side is that I think like most companies as we haven't done enough, but it's a very strong focus for us and continues to be because we see it's not only socially just to have a diverse and inclusive workforce, but some of that R&D and growth that I highlighted is that you have creativity in terms of listening to your customers differently and coming up with different solutions. If you bring people together, they have different walks of life, or they've come to the problem differently. So, as a company, we really see as ESG is fundamental, not only to our renewable strategy and our discussions with our customers, but in terms of our creativity.
There's a lot to dig into there. One of the questions we're asking all the companies at this conference is about ESG. So, since you were just talking about what you're doing on ESG, if we could just unpack that further, for a moment and maybe you could discuss the top three priorities to improve your ESG score over the next year.
So we were one of the 100 companies that signed up for science based targets. This was back, or I guess about 4 years ago, and we had set a goal that we reduce our emissions by 25% by 2025. By 2019, we had reduced our emissions by over 52%. So 6 years early 2x, what we had -- what we committed to as part of the top 100 companies with very strong renewable goals. As you sit here now going forward, and as I say over 100% of our energy that we sell to our customers or that capacity center we sell to our customers is covered by green energy is we feel very comfortable that we're going to easily be carbon neutral to negative by 2050.
So we're -- we feel like we’re -- we've been -- it's been a maniacal focus for a long time. In fact, we were the initiator or the developer of the Green Power Pass for data center customers. So and our customers -- and this resonates with our customers. The reason why we could talk about the Goldman Sachs Company, the Boeing Company, Credit Suisse as customers is because they've signed on for our Green Power Pass.
On the social side is that we've had as at one of our core values. The teamwork diversity inclusion is a key point of who we are as Iron Mountain and where we're going. And again, from what I just said before is that the main part of that is that the -- it's not just the social justice aspect. If you hire people who all went to the same schools grew up in the same neighborhoods, guess what? You're going to continue to double down on serving your customers on the same products in the same way.
So we've always had a view that if we want to actually get the most out of our relationships with 950 of the Fortune 1000 who we count as our customers for decades, it really helped them move the needle for themselves. We need to be having a different conversation with a different insight. And you can only do that if you're bringing people in from different walks of life, different backgrounds and making sure they're inclusive when they show up.
Now, sadly, after the murder of George Floyd, we looked at ourselves in the mirror and whilst we have ERG's or Employee Resource Groups across the company that help us become both more diverse and more inclusive, and we have made very good progress in a number of those dimensions, but nowhere near as high as our expectations. So I'll be the first to say that we were disappointed when we did a retrospective ourselves this year. And but at the same time we committed ourselves and to accelerate that progress.
And I think some of it is to say that it's not where we want it to be. But I also don't think we would have gone from $10 billion of total addressable market in 2015 to $80 billion today, if we had made some progress because as they say that growth in total addressable market is a big part in terms of our diversity inclusion strategy.
Thanks. And you mentioned some of the objectives, the financial objectives that you have for 2021, the revenue growth you mentioned, you just had your earnings where you laid out some of the financial priorities and we'll get into that in a few moments. But as you think about the year 2021, and achieving the success and the goals that you've laid out there, what are the key priorities or objectives that investors should be keeping in mind for you to get to what you've outlined for your aspirations?
I'm going to let Barry answer that. I mean, the good news with our business for those even watching it as we sit here at the beginning of the year, it's pretty -- you have pretty much direct line of sight to most of it as we start the year because the nature of the business. But Barry?
Thanks Mike for the question. I think, I'd point to a few things. One, the continuation of our revenue management program, which we've been generating 2 to 3 points of top line growth from for several years. And we certainly feel very -- very good about where we are progressing with revenue management this year. As I mentioned on the call recently, we have nearly all of the actions embedded in our guidance for that line already taken at this stage in the year. And so that has very strong visibility.
Second thing would be, from a standpoint of the way we're thinking about volume, we're expecting that to be flat to slightly up in as Bill said on the call. We're not expecting COVID to be any sort of bounce back this year from a planning posture. I think that hopefully as the vaccines get out there, we'll see that the incremental tailwind for the trajectory, but we're planning I think conservatively as it relates to volume.
On the data center side, which you know is a very key portion of our growth. The great news is that the team had phenomenal success last year in terms of new leases signed, and so we know as you would expect, we have very good line of sight on commencements of those. And so, I would say investors should be watching from the standpoint of how that data center business continues to trend. We're expecting growth of kind of low double-digits approaching mid teens. So that's a meaningful portion of our total growth for the company.
And then I would say on the on the profit side. Look, the -- our Summit Project, which is underway and we've already delivered a considerable amount of benefit, we are planning for delivering $150 million of incremental year-on-year savings this year to improve EBITDA with another $60 million tranche year-to-year next year. And so those would be the three or four things that I would immediately point to.
The other one I would say is beyond the P&L would be our development of the data center development CapEx that we're putting to place. We've got plans to deploy $300 million and that we also announced the signing of our investment in India for a joint venture. They are on the data center side as well as watching our leverage, which we expect to continue to trend lower over time. So it's -- those would be some of the things I would highlight.
Thanks. And you mentioned the savings from Project Summit. So I had a question about that. So and please correct me if I didn't get any of these numbers correctly, but this is from your guidance slide that you just recently published. So with Project Summit, you're targeting $150 million of savings in 2021 and EBITDA growth for the full year for the whole company is guided at $125 million to $150 million increase. And so the question is, what are the costs that are offsetting the revenue growth guidance of $178 million to $328 million, where the EBITDA growth is at or below the summit savings, right? So, where's that difference and where are those costs going that are offsetting that revenue growth?
Yes, it's a good question, Mike. There is some noise this year in light of, I would say, prudent and conservative posture as it relates expectations around things like normal inflation, and on things like compensation, rent and we also have some sale leaseback increases year-on-year in light of the relatively large for our sale leaseback that we executed in December of last year, noting that those will be -- those proceeds will be invested in 2021.
We've also assumed a level of incremental costs from prior what I would call discretion in the COVID year. And then we are -- I think postured from a paper price standpoint to be conservative, we're expecting that to be a $10 million drag to EBITDA in light of where prices were recently. And so -- but the key thing I would point you to though is we're improving our EBITDA margin this year despite those conservative postures are related to those costs.
And as you get out beyond this year, as we see the opportunity for a revenue growth to continue to grow and potentially even expand, as Bill mentioned on the call, our addressable market is much larger over the last few years and continues to grow. We should and you should expect EBITDA margin to continue to grow faster than revenue as we get out beyond this year. So therefore seeing profitability continue to expand. That's a good question. Thank you.
Sure. And maybe taking a step back, one of the things that we heard all through the pandemic is that digital is accelerating. So the digital trends, digital migrations, embracing more software solutions, and we'll talk about the data center business in a few moments in relation to digital. But help our clients understand what the acceleration of digital could mean to your analogue business, the storage business?
It's really a good question, Mike. You would expect, if you look at the data is that you don't see a major change, not saying, do I think that we're going to continue to have headwinds in that business? Yes. But I would call it's more kind of a breeze because what I've said, I think probably last year, when we were together, is even if you look at the negative volume growth, that we had positive revenue growth because price more than makes up for that, but a little less than -- little bit -- roughly a little bit more than 1% decline in volume on an organic basis. That's really driven by second derivative effect, right?
So do I think that second derivative impact is going to change anytime soon? No. And just to be clear is every single customer even during COVID, is still sending us new boxes, right? So we don't see anybody just saying, okay, we're not sending you any new boxes, and we don't see the same just in wholesale destroyed. So the one thing we see it is very steady in the business is that someone sends us a box today, it will sit there for 15 years on average, that has not changed during COVID, it didn't change before COVID. We don't see any indication with the conversations, they have customers that they're going to have a different view of the retention of that box.
The one thing we do see is that some of our most mature verticals like legal, which is one of the slowest growing verticals, is we still see slightly positive organic box growth in that, right, on a physical storage side. Where the negative is just to be clear, is the faster growing verticals that used to be if someone had 100 boxes with us, they'd be sending us 10 new boxes a year, well, now they were sending us 8, then they now they're sending us 6.
And what happens with that particular customers, as some of our larger verticals around financial services, is that the average age of the inventory ticks up, so you get a higher percentage that are being destroyed at that 15 year time of destruction than the rate that they're coming in. So we don't see a change in that trend. But it also means that what we're talking about is we're talking about kind of low single-digit drag. And that's more than offset on price.
Now, on the other side, what we do see is an uptick in digital services that we can provide around that and on governance. So, I said the 8% growth on digital services that we had this year, it isn't just scanning things, many cases we're ingesting stuff that's born digitally and helping them manage that way in a both a compliant way, but also drive more insight. So I think I use an example on one of our earnings calls for a large European Bank in the United States, where we actually help them accelerate their application process for auto loans.
And in consumer finance, for those of you that follow, it is the first person who get to say yes to a customer usually gets the loan, right, they get the business. So you want to be able to be fast, but do it better, same or better credit outcome. So you're doing things like that with our customers because they trust us with their information and their -- our understanding of their business flows.
And in some cases, it's hybrid. Some cases we do have to ingest digit -- we have to digitize some physical information as well and combine that with a digital. So kind of a -- we definitely see that our customers are asking for more and more of our digital services to help them on their digital transformation. We do see as I called out on the call that our image on demand. In other words, instead of people asking for the physical document back they asked us to scan it, put it in our secure cloud platform and store it there, so they can access that which gives us another revenue stream, which quite frankly is more profitable for us. We see an acceleration of those services. But we don't see a major change from what I call second derivative effects in terms of the breeze that's facing us on our document storage business, or analogue business, as you call it.
And those comments around volume and trends, is that more of the domestic business that you were citing? Or is that the performance of the global business that you were citing?
That’s a really -- yes, we give you the business globally, but it's a very good question, Michael. So if you go, if you kind of separate the business out a little bit, is you -- yes, I mean, North America probably has more of a breeze in its face than Western Europe even. And then if you look at Eastern Europe, Latin America and Asia, those are typically more positive markets because they're earlier in their outsourcing and also the GDP growth is higher.
And is there as you look, we learn the macro from you the high level trends, and as you were describing, you get to see the micro by market by vertical, by duration of the box sitting in your facility. Is there any tipping point risks that investors should be mindful of where if you go out a few years on these trends, there could be a step function change in the trend? Or do you see kind of the progressions, both domestic and international, as much more smooth.
It's much more smooth because it is -- because going back is the second derivative that's causing. In other words, there's not a single customer that's just stopping sending us boxes, right? So it's the rate that they're sending us instead of the average age of their inventory is ticking up. So if you think about -- another way of thinking about it is, I know that it's just counterintuitive.
And it is really good to talk about this because it's the biggest drag on our stock, because people just feel like, oh, these guys a big part of their profit comes from storing paper is going away, so their dividend is the same. I mean, that's why we're sitting at a 7% dividend yield, right? Because it doesn't make sense the rate that we're growing AFFO that we should be sending at a 7% dividend yield, because you're talking about, even absent Summit you think, we just over the past few years before Summit have been growing AFFO, 4% or 5%, 6% a year, then with a 7% dividend yield you're talking about 12% DSR.
So what does that say, it says that people feel like it's happening much quicker. The one thing I would say, because of the second derivative effect that I described is the financial model of this business, it's nothing that's going to change it for the next 10 years on the negative side, because of that, the analogue part of the business, as you call it, right? And then if you add the growth in the new services, and the fact that we've expanded the TAM, to me, there's a lot of upside. So there really is no -- look, nothing lasts forever, to be to be clear. But if you think about over the next 5 to 10 years, do I see something that's going to fundamentally change the financial model of this business that threatens the dividend from the analogue side of the business? No.
Maybe pivoting to digital, you talked about what was happening with the data center business over the last year. Can you talk about what was driving the bookings and the growth and maybe unpack some of the experience between verticals, bundling with existing customers and what your approach to the market is now in the upcoming year to continue to grow the data center platform?
Okay. So I think you have to take the 58 plus megawatts that we leased up in 2020 in two chunks. So if we take out Frankfurt, which was over 27 megawatts, there's a certain amount of lumpiness, right? We were working on that in 2019, right. So, it's when those things sign, so it's kind of -- these are kind of like big elephants, so you just can't predict them. So, if you look at the 31 megawatts, just over the 31 megawatts alone, that was, well, I guess it was almost 2x. We get guided 15 to 20 megawatts we thought we would do for the year. So it was clearly a very good year for us. And that's also given us our guidance for 25 to 30 megawatts for 2021.
And the other reason why it's a little bit below what we did last year, there's always a bit of hyperscale that's in there which have long gestation, the lead times and you can't predict that completely. But what we feel really good about is on the enterprise side. And to your point, I think that our brand, in terms of security and the relationships we have with some of the largest enterprises, the ones we can talk about publicly, as I said, it's like Goldman Sachs, the Boeing Company, and Credit Suisse is the level of trust because these are very important and have to be very secure and very reliable assets. I think that really works to our advantage and then you put the green aspects around it and decades of relationship, it really makes a difference.
So, we don't see our success in 2020 has -- oh, all of a sudden everybody went digital and everyone's on Zoom and that's driving the demand. Because on the enterprise side, these are longer trends as they start moving load to public cloud, that's a trigger event for them to think about a private cloud deployment or co-location deployment, or the data center is getting old. Those are trends that had little to nothing to do with COVID.
Some of the demand that we're starting to see pick up on some of the hyperscale, you're just starting to see the lockdown in 2020 starting to impact their forecast, right? I say in the second half of this year, but, again, that will drive leasing much more in 2021 and 2022, than it did in 2020.
And when you look at what your enterprise customers want from you, is it more than just security and cooling and power? Is there a hunger for some additional managed services, some of the other data center firms in the category are introducing network fabrics, some degree of managed services in [indiscernible]. What are you doing for your customers? And what's the opportunity to do more than maybe just kind of the straight co-location stack that's typically provided?
That's a really good question. So I think some of the things that that our customers kind of call us out for. So, first of all, we have an advantage, 40% of our sales leads come from our traditional sales force. So they actually see the trends before they -- our customers even go to an RFI RFP. So we actually are able to have a conversation earlier on because we're already in 35,000 data centers a month just in North America, right. So that that's kind of one aspect.
The other aspect to your point is for some of our customers, they have a high occupational health focus is they comment that when they come into our facilities, they feel the difference, right. And we have a very strong view on safety, the way that we differentiate visitors from people who work in the facility, even myself, if I go into one of our facilities, I wear a different colored vest. So it's known that I'm not from that facility, right. So all those things, there are certain customers that are very sensitive to that, because they're sensitive because their employees are actually working in servicing that site. So that's another aspect of it.
But then when it comes to some of the new services that you were saying is that I would say we're -- we personally are in the early innings, even though we have some very highly connected sites is I don't think we've actually have I'd say, fully taking advantage of that as much, because Equinix that is clearly their model. But we do have sites that like in Phoenix and Amsterdam, and in Slough state in London that have the same connectivity, in some cases, even higher than the nearby Equinix facility. So I think that's an opportunity for us.
And then the other area, which differentiates with the customers is which I think you're -- kind of the helping hands type thing. So in other words, people do trust us because of our hit decades history with them to do certain services, and also tracking equipment. So we put the same tracking on equipment that's going in and out of the data center that we do for our traditional customers around document management, document storage. We actually do the processing for one of the largest mortgage custodial businesses in the world. So we bring all that expertise and tracking knowhow within the walls of the facility.
And what are you seeing in terms of the pricing trends for the different data center products you offer the enterprise versus the hyperscale? And how should investors think about the development yields from these deployments as you continue to push forward in the business?
So I think the -- I would take the pricing into two buckets, right? If you say, what do we see the pricing trends on enterprise, I kind of like a two by two. Think about enterprise hyperscale assets that we acquired, assets that we've built in and grown. So if I look at enterprise on assets that we built and grown, is we don't see any -- we don't see very much in terms of roll downs. We actually see normal kind of inflationary growth in that category.
If we look at enterprise in terms of assets that we acquired, we have seen roll downs because the nature of these assets that we bought, were maybe 10 or 15 years old, and at that stage in the industry, they were signing up for extremely high rates, right, their cost to build was higher back then as well. But so -- there the returns on capital haven't worth that much higher, but it's still they had much higher rates, and we've gone through some adjustments. And we've talked about that on our quarters because we -- when we bought those assets, we actually built it into our model. So we have seen some roll downs on assets that we acquired, as we expected.
On the hyperscale side is that we're new in the hyperscale quadrant. So stuff, I would say hyperscale deployments that we have built, is we haven't seen -- we're relatively in the early innings. But we see that those assets are clearing somewhere between, let's say, 7% and 9%. But more it kind of in the 7% to 8% range in terms of cash and cash returns. And we didn't really acquire many hyperscale assets. We have some hyperscale logos that we acquired to the portfolio, but these were typically non-hyperscale deployments. So we haven't seen too much roll down.
So overall, I would say that on stuff that we've built, that we haven't seen it, but we have seen some of the acquisitions in terms of a change in pricing. Overall, we still see kind of, on the enterprise or co-location side, somewhere between 12% and 15%, cash on cash returns, depending on the size and the employment and the duration of the deployment. And then what we see on the hyperscale, as I said, really kind of 7% to 8%, maybe sometimes getting close to nine, but really more in the 7% to 8% cash on cash. And then if we look at on a blended basis to our larger campuses, like Northern Virginia, we expect then it'll blend to about 11% to 12% cash on cash return.
Hey, so maybe the last question before we get to our annual rapid fire, is -- as you've talked about digital and it goes beyond the data centers in terms of the opportunity for digital for Iron Mountain that you've described. But as you think about digital, are you considering further accelerating that in terms of investment in what you want digital represent as a percent of revenue over the next 3 to 5 years relative to the heritage business that you've had for many years.
So as we sit here, right now on, I would say absent a data center, it's about 7% of our revenue is coming from digital. And I'd say, we're expecting that to grow well, north of 10%, in 2021 in terms of our line of sight, and if you put this together with it, as we're approaching 15% of our total sales, is that I wouldn't -- we feel really comfortable that we have the right products and positioning for that TAM of $80 billion, and a lot of that is digital, whether or not we -- feel like we need to make small acquisitions.
And I would emphasize small to actually build out some of our services, we may. But we actually feel like that we have the right product fit -- product customer fit. And we're probably going to even narrow our focus as we go down the road. Right now there's probably seven platforms that we feel that address that market, but we don't see any major acquisitions, or large scale investments. I mean, there's always some blocking and tackling, but nothing large.
Thanks. Well, let's get to our rapid fire questions. So the first one is, when we're sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over that prior 12-month period?
I think they will be surprised by not just the robustness of the traditional side of the business, is the continued acceleration in the growth of the business. And as I said, I think we surprised the market this year by setting guidance where 4% to 8% organic revenue growth, which the market has seen before.
What do you think your corporate travel budget will be next year as a rough percentage of what you spent in 2019?
I think it's probably going to be around 70% to 75%. I think we've all figured out different ways to work. So I don't think -- and you see that from the airlines, none of the airlines are expecting to get back to 2019 levels until the second half of this decade.
What will the same-store NOI growth before your property sector overall, not your company in 2022?
For asset, we're kind of a sector of one. So I don't know how. If I give you that answer I'm giving you our guidance. So I'm not going to go there. Good try.
You like to -- you want to talk about the data center sector then, where it's …
So I think data center -- I think data center sector is going to continue to grow in mid teens organically.
Finally, what will the 10 year U.S Treasury yield be 1 year from today? Today it's about 1.5%.
I think it's going to be two in a quarter. But I was wrong last year, so we'll see.
Well, thank you all for your time. It's great to see you virtually and I do look forward to the opportunity of [technical difficulty] this in person in the future. Thank you.
Okay. Stay well everyone. Thanks.
Thanks. Stay well. Thank you.
[No formal Q&A for this event.]